Three reasons why Mauritius tax treaty may bring in more long-term flows to India

Aprajita Sharma  New Delhi     Last Updated: May 11, 2016  | 16:57 IST
Three reasons why Mauritius treaty may bring in more long-term flows to India
Expert believes while the decision may have an impact on short term investors but will not dissuade long term investors to come to India. Photo: Reuters

The volatility in the market on Wednesday, though in the lower territory, evinced mixed signals if the marketmen read through the Mauritius tax treaty in the positive or negative light, but market analysts are sure the amendment is a forward looking move and would bring the domestic and foreign investors on a level-playing field.

Kotak Institutional Equities, in a note, said the move will result in similar tax treatment of capital gains for both domestic and overseas investors and establish a more stable and transparent taxation regime for overseas investors.

"In the short term, the decision could spook the markets. But in the long run, the modification in the treaty will prove to be a new sunrise era of clean and meritorious financial markets wherein minority investors can be assured of the integrity and genuineness in the capital markets," told Jimeet Modi, CEO, SAMCO Securities to Business Today online.  

Mustafa Nadeem, CEO, Epic Research also echoed the similar sentiment when he said that we may have a moderate hit in the short term but likely witness a large inflow of funds in fiscal year 2017.

He added that equity markets will have its course and that we are still in a primary bullish trend.
We have compiled three reasons why investors shouldn't be jittery about the fresh amendments in Double Taxation Avoidance Convention (DTAC) with Mauritius:

1) Govt avoids going retro

Learning lessons from the past to offer relief to existing investors, the government made it clear that the shares acquired before 1 April, 2017 will not be taxed by Indian authorities. Experts said the decision to grandfather investments up to March 31, 2017 will lend tax certainty to investments.
"The best thing about the revised treaty is that it will be prospective and adequate notice of one year is given in advance for change in tax regime which is so much fair from the government. Only fresh investments will be liable to such new taxation and old investments will still enjoy the exemption benefits which is utmost fair and reasonable," said Modi to Business Today online.

2) Two-year transitionary phase

Under the amended treaty, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019.

While short-term capital gains are taxed at 15 per cent in India, they are exempt in Mauritius.

3) Investment over 12-month anyway exempt from taxes

It is notable that capital gains arising out of long term investments of 12 months are anyway exempt from taxes in India. In this backdrop, Rohit Gadia, Founder & CEO, CapitalVia Global Research believes while the decision may have an impact on short term investors but will not dissuade long term investors to come to India.

"The decision can have an impact on short term sentiment but we doubt it will impact long term investor fund to come to India considering the fact that for FIIs, capital gains on shares held for more than 12 months would anyway continue to be exempt from tax. And the way the treaty changes implementation has been thought off is well designed, it is unlikely that it will create an immediate impact on FIIs inflow. However, we may see short term volatility to increase in stock market, which should come down gradually with more clarity," said Gadia.

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